Downsides to long-term mortgage fixes

Clients who are interested in fixing for the long-term to counteract potential rate rises should be aware of possible downsides to signing on that do

Clients who are interested in fixing for the long-term to counteract potential rate rises should be aware of possible downsides to signing on that dotted line.

Potential issues include the lack of flexibility should a client’s situation change and they need to move or downsize, the risk rates might go even lower, locking them in at a higher rate than would be offered elsewhere, and the early repayment charge (ERC).

“Situations change”, says Adrian Anderson, director of broker Anderson Harris, “and trying to envisage what is going to happen to you over the next 10 years is hard.”

John Eastgate, sales and marketing director for OneSavings Bank, agrees. “Committing to a long-term fixed-rate deal can be an issue if your circumstances were to change.

“For example, if you took out a 10-year fixed rate, a lot can happen in that time. You could move jobs, have a family or separate from your partner.”

Flexibility

According to Mr Eastgate, clients should be well advised of the potential lack of flexibility with long-term fixed rate mortgages. While some people might not intend to move – perhaps their children are in a good school in the area and there is plenty of room – and therefore a seven or a 10-year fix would be sensible, life rarely follows a linear path.

While long-term fixes could be a great option for both certainty and security, they are not always flexible.

Jeremy Duncombe

He says: “If you need to move home or borrow more money during the fixed term, you may find your options reduced.

“There is no guarantee your lender will agree another mortgage with you as either your circumstances or their criteria may have changed. Even if they can lend, their products may not be the most competitive in the market.”

And “borrowers often don’t like the thought of tying themselves into a product for too long without having to pay a penalty”, says Paul Darwin, director of intermediary relationships for Skipton Building Society.

For Andrew Montlake, director of London-based Coreco, this lack of flexibility with long-term fixes is nothing new. He explains: “The downsides are the same as they have always been, and relate to the tie-ins applicable to such products.

“It is all about getting the right advice and, for those people who need more flexibility or maybe want to sell or move in the next two to three years, then a longer-term fix may not be the best advice.”

Jeremy Duncombe, currently director of the Legal & General Mortgage Club, comments: “While long-term fixes could be a great option for both certainty and security, they are not always flexible.

“Borrowers whose circumstances have changed or are likely to change, perhaps the result of a divorce or a need to relocate because of work, might find these types of mortgages can be particularly restrictive and can carry heavy ERCs”.